1. Field of the Invention
The present invention generally relates to a computer assisted and/or implemented process and architecture for administering an investment and/or retirement program, and more particularly, to a computer assisted and/or implemented process and architecture for administering an investment and/or retirement program to maximize the investment and investment performance, and to minimize government obligations (e.g., taxes) associated therewith.
2. Background of the Related Art
Retirees generally have three primary sources of income: pensions, savings they have accumulated in their company retirement plans, and Social Security.
Pensions are technically called defined benefit plans. Through them, your employer promises to give you a specific monthly income (or in some cases, a lump-sum check in lieu of a monthly income) starting at retirement. The amount you receive is calculated by a formula that considers your salary, the number of years you have worked for the company, and other factors. The formula may be different at every company.
Most workers entitled to a pension at retirement are offered several options regarding how to collect the benefit. The two most common options are single life annuity (which gives you a monthly income for life, but which stops upon your death) and joint and survivor annuity (which provides you with a smaller monthly income but which continues as long as either you or your spouse is alive).
All retirement plans--whether individual or company-sponsored--offer two major benefits:
You do not pay taxes on any of the money that is contributed to the plan until you begin withdrawals, and PA1 Any interest, dividends, or capital gains that accumulate in the plan are tax-deferred until withdrawal.
An IRA is the most common type of retirement plan. These are maintained individually rather than in groups. With any retirement plan, you know how much money is being placed into the plan, but you have no idea how much the plan will be worth when you retire. Thus, retirement plans are technically known as defined contribution plans, and they are the exact opposite of defined benefit plans, where the result is known but the amount that needs to be contributed is not.
Like all retirement plans, including those established by companies for their employees, you do not pay taxes on any of the money that is contributed to the IRA until you begin to make withdrawals, and any interest, dividends, or capital gains that accumulate in the plan also are tax-deferred until withdrawal.
Company retirement plans generally involve either a Simplified Employee Pension Plan or the 401(k) plan.
If you have any self-employment income, from baby-sitting to shooting wedding videos, you may qualify for a Simplified Employee Pension Plan, known as a SEP-IRA. SEPs are as easy to use as IRAs and almost identical as well. But they offer one major advantage over IRAs: instead of being limited currently to a $2,000 annual deductible contribution, you can put away 15% of your self-employment income, currently up to $22,500. You are permitted to do this even if you or your spouse participate in another pension or retirement plan.
SEPs involve minimal disclosure and reporting requirements. You can contribute different amounts from year to year, and you can currently wait until April 15 to contribute for the previous year (or later if you file an extension). Other plans must be established by December 31.
Although the law says you can place up to 15% of your net taxable income into a SEP-IRA, the correct figure is really 13.04%. The reason is as follows: Say your net taxable income (that is your profit minus expenses) is $10,000. Fifteen percent would be $1,500, which you'd place into a SEP-IRA. But that would reduce your net taxable income to $8,500--and $1,500 of $8,500 is 17.65%--meaning you've contributed too much to the SEP, leading to major headaches with the IRS. Thus, the correct amount you would be permitted to place into your SEP would be $1,304, which is only 13.04% of $10,000.
The 401(k) plan--so-named by the tax code section that created it--is offered by more companies that any other type of retirement plan. There are generally four contribution methods for 401(k) plans.
Method #1: The Employer's Basic Contribution
This contribution usually is a percentage of payroll. For example, Ken, 45, makes $40,000 a year and his company contributes 1% of his pay to the 401(k) plan every year. Although the money is Ken's, he is not taxed on it, and the money grows tax-deferred inside the plan.
Method #2: The Employee's Voluntary Contribution
Depending on where you work, you may be permitted to contribute up to 15% of your pay. For example, Ken is allowed to invest up to 5% of his paycheck into the 401(k) plan. He gets a tax deduction for the amount he contributes, and like the employer's contribution above, this money grows tax-deferred.
Method #3: The Employer's Matching Contributions
Through this method, the company contributes a percentage of what the employee contributes. For example, Ken's company adds 25 cents to the plan for every dollar that Ken puts in himself. This increases Ken's stake by 25%, yet he is not taxed on this money, and it too grows tax-deferred until he retires.
Method #4: The Employer's Profit-Sharing Contribution
This is an additional contribution that the company voluntarily makes each year based on the firm's profits. For example, Ken's company typically gives Ken a bonus equal to 3% of his pay, which is deposited into the plan on Ken's behalf. Like the other contributions, this one too is not taxed and it grows tax-deferred.
Thus, of the four ways money goes into a 401(k), only one comes from the employee--making these plans a great deal for workers! All told, Ken contributes $2,000 of his own pay to the 401(k), a contribution that costs him only $1,340 because the contribution entitles Ken to a tax deduction that saves him $660 in taxes. On top of that, Ken's employer adds another $2,100--$400 in basic, $500 in matching and $1200 in profit-sharing contributions--and all of it is in pre-tax dollars which grow tax-deferred. Thus, for every dollar Ken contributes to his 401(k), his employer contributes $1.05. Put another way, for a $1,340 investment, Ken's account is worth $4,100--and that's before his account earns a penny from interest, dividends, or capital gains!
Another primary source of retirement income is Social Security. Under current law, the maximum Social Security benefit for a worker and spouse is $22,464 per year. Therefore, even if Social Security continues as is, it alone is not likely to provide you with a comfortable retirement.
The current age to be eligible for full Social Security benefits is currently 65. But that is only for workers nearing retirement. For younger workers, Congress already has cut back the benefits. For example, those born after 1959 are not eligible for full Social Security benefits until age 67. (They can start receiving benefits at 62, but they will get 30% less than if they wait until 67, not 20% less like those retiring today.)
Even though everyone Social Security, pensions and retirement plans are, they are not enough to satisfy your retirement income needs. Yet many workers who are covered by these programs often have terrible personal savings records. Many are in for a shock when they discover at retirement that their retirement income is a fraction of their pre-retirement pay.
For example, workers earning $50,000 a year who plan to retire with nothing but a pension and Social Security can expect their income to drop 36% the day they retire. That's right: they will get pensions worth only 44% of pre-retirement pay and Social Security will provide only another 20%. FIG. 1 is an illustration of a typical retirement benefit when the final pay is $50,000. Could you afford a 36% pay cut right now? If you cannot, what makes you think you will be able to afford such a large cut at retirement?
The retirement situation is even worse for higher-paid workers. If your final pay is $150,000, pensions and Social Security together will replace only 36% of your income. You will lose a whopping 61% of your income when you retire! FIG. 2 is an illustration of a typical retirement benefit when the final pay is $150,000. If you are thinking that is not a problem for you because you don't earn anywhere near $100,000, think again: if you and your spouse jointly earn $50,000 today, a mere 4% annual pay increase over the next 20 years will place your income about $100,000, as illustrated in FIG. 3. So, as important as it is that you participate in your company retirement plan, you need to save even more.
As discussed above, the above retirement programs are generally insufficient to adequately fund or support an individual after retirement, and supplemental investment vehicles or programs are required to cover these additional costs.
For example, one significant cost that is generally not covered by retirement programs is the cost of college for children that enter college after their parents have retired. The cost of college is so significant, that different types of investment programs have emerged to fund the cost of college. These investment programs are designed to fund the cost of college based on long term savings.
For example, U.S. Pat. No. 4,722,055 to Roberts, incorporated herein by reference, relates to methods and apparatus for funding a future liability by means of an insurance investment program. The system estimates the expected cost of the liability when the liability is expected to occur and computes the present value of each unit of insurance needed to yield that expected cost at maturity. The system also aids the insurance fund manager in making decisions regarding investment of fund assets in order to meet present and future obligations of the fund.
FIG. 4 is a flowchart of the computer process for funding a future liability in the Roberts patent. In FIG. 4, the customer transaction operations performed at the point-of-sale stations include blocks 11-14. Customer transactions can be purchases, payouts, or redemptions of fund units. Unit purchase data is entered at block 11, unit payout data is entered at block 12, and unit redemption data is entered at block 13. Each entry includes the customer's name and account number and the transaction amount. The entered transaction data is stored at block 14 for transmission to the central processing facility.
The transaction data accumulated at the point-of-sale stations is transmitted periodically (e.g., daily) to the central processing facility. The data for each incoming transaction is processed individually in a loop beginning with block 15 and ending at block 25 where all transactions in a batch (e.g., a day) are totalled prior to further processing as a group in accordance with block 26 et seq. The incoming transaction data is first subjected to test 15 which determines whether the transaction is a purchase (NO output) or a redemption (YES output).
If the transaction is a purchase, the system flow passes to test 21 which determines if the purchase is the first transaction in a new account or an additional transaction in an existing account. For new accounts the system flow passes to block 22 which creates a new entry in the account list based on the transaction data. Transaction data for both new and existing accounts then passes to block 23 which checks the transaction data for possible errors in calculation at the point-of-sale station.
If the transaction is a payout or a withdrawal, data flow moves from test 15 to block 16 where the transaction data is verified to confirm that it is from a valid account. The account information necessary to verify the transaction data is supplied from the account list stored in the system's master file, shown at block 17. Thereafter, the data flow passes to test 18, which determines whether the transaction is a payout (withdrawal at maturity) or a redemption (withdrawal before maturity). Payout transaction data passes to verification block 23. For redemption transactions, the redemption before maturity penalty (RBMP) must be calculated. This is accomplished at block 19.
The RBMP calculation is based on the current value of an insurance unit which is a function of the present college cost data. The college cost data is supplied from one of the system's data files shown at block 20. From the RBMP calculation, system flow for redemption transactions also passes to verification block 23 which checks for possible errors made at the point-of-sale station.
From verification block 23, system flow passes to block 24, where each transaction is recorded in the system's master file, and the customer account list data is updated. Thereafter, system flow passes to block 25, where purchase, payout, and redemption transactions are totalled. Next, system flow passes to block 26, where the current spread calculation is carried out to create an updated schedule of the current charge to customers for insurance units based on the prevailing college cost and inflation rate data. The updated schedule of current charges is transmitted to the point-of-sale stations. There, the schedule is used by the salesmen to provide cost information to customers and to set the cost for unit purchases, unit payouts, and unit redemptions.
System flow then proceeds to block 27 which carries out the update asset position operation to determine what investment transactions should be made in the fund investment portfolio based on current and projected customer transactions. The data processing system advises the fund manager of its determination concerning the net amount of required investment transactions and provides a list of the investments which might be suitable for purchase or sale. Based on this information, the manager can choose the investment transactions to be made and enter the investment transaction data into the system.
After the investment transaction data is entered, system flow passes to block 28, where a report is created for the investment manager which details the changes made during the period, including the transaction totals for the period, the fund assets purchased and sold, the projection of the cash flow requirements for customer transactions, the projection of the cash flow generated from the fund assets, etc. Next, system flow passes to block 29, where the system periodically (e.g., annually) prepares a tax liability statement for each customer and for the fund manager. Also, at block 30, the system prepares another periodic report (e.g., quarterly) to provide the customer with current account information.
Another prior method, U.S. Pat. No. 4,752,877 to Roberts et al., incorporated herein by reference, is an insurance investment plan that is implemented using a floating rate zero coupon note for funding a future liability. FIGS. 5-7 are flowcharts illustrating the computer process for funding a future liability using a floating rate zero coupon note. In FIGS. 5-7, at the beginning of each period certain variables used in the data processing system must be initialized (block 101). These variables include: the number of transactions during the day (TDAY), the number of transactions during the period (TPERIOD), the number of contracts sold during the day (DSALES), the number sold during the period (PSALES), the number redeemed during the day (DRDMP), the number redeemed during the period (PRDMP), the number of floating rate zero coupon notes of each maturity M (FRZCN(M)), and the number of each maturity sold during the day (DSFRZCN(M)), sold during the period (PSFRZCN(M)), redeemed during the day (DRFRZCN(M)), and redeemed during the period (PRFRZCN(M)).
Customers interact with the system at point-of-sale stations. These can be located at remote points limited only by the ability to communicate electronically with the central computer. Orders and customer inquiries are collected at the point-of-sale stations (block 102). The customer first enters his name (NAME) and account number (NUMBER), or if he does not have an account, indicates that a new account is to be opened. The customer then enters an order or inquiry (referred to generically at block 102 as DATA). A customer may submit a purchase order (block 103) or a redemption order (block 104) or may simply inquire as to the status of his or her account (block 105). Transaction requests include an identification of the floating rate zero coupon note to be purchased or redeemed and the transaction amount (referred to generically at blocks 103 and 104 as CONTRACT). Inquiries specify the particular information items requested. These orders are transmitted to the central computer, and information regarding transactions, floating rate zero coupon note prices, and account status are received back from the central computer and displayed on a CRT terminal (block 106). Alternatively, purchase orders and redemption orders could be stored at block 106 and transmitted periodically (e.g., daily) to the central computer for processing. At the conclusion of each transaction, a customer can request a printed confirmation record of the transaction (block 107).
Each customer request is processed individually in a loop beginning with test 108 and ending at block 125. The incoming request is first subjected to test 108. If the dollar amount of the transaction (AMOUNT) is equal to zero, the request is an inquiry, which is referred to blocks 109-111 for processing. The status of the account is checked at block 109. Information the customer requested is retrieved from the master account file at block 110 and the response is transmitted to the investor in block 111. The requested information is displayed on the CRT terminal.
If AMOUNT is not equal to 0, the customer request passes to test 112. If AMOUNT is less than 0, the request is a redemption request, and the system flow passes to block 113. At block 113 the account information is verified by checking the master account file at block 114 to make sure that the account is valid and that it contains the floating rate zero coupon notes the customer wishes to sell. When the account information has been verified, data flow moves to test 115 where it is determined whether or not the customer is requesting early withdrawal--i.e., redemption prior to the scheduled maturity date of the floating rate zero coupon note. If so, the early withdrawal penalties are first calculated at block 116. Otherwise control passes directly to block 117 where the redemption value for each of the floating rate zero coupon notes the account holder wishes to redeem is calculated.
The calculation of the redemption value for a floating rate zero coupon note is based on the periodic escalation rates in the cost of the service or commodity giving rise to the liability being funded-e.g., college tuition-over the life of the floating rate zero coupon note and involves a downward adjustment for any early withdrawal penalties. The current value of the floating rate zero coupon note is calculated by escalating the base value of the floating rate zero coupon note at the date of purchase at the rates of escalation in the cost of college between the date of purchase and the date of redemption and adding the unamortized premium or subtracting the unaccredited discount, as appropriate. These escalation rates are taken from the master file of escalation rates in U.S. college costs at block 118. After the redemption value has been calculated, the amount of cash that will have to be paid to the account holder is subtracted from the amount of cash in the system at block 119. Control then passes to block 123.
If instead AMOUNT is greater than 0, the request is either a purchase request or an installment payment relating to an earlier purchase. In that case, control passes from test 112 to test 120, which determines whether the request pertains to a new account. If so, a new account is opened at block 121. Otherwise control passes to block 122 where the amount of the cash payment is added to the amount of cash in the system.
Transaction data for both redemptions and purchases then pass to block 123 which checks the transaction data for possible errors in calculation at the point-of-sale station. From verification block 123, system flow passes to block 124 where each transaction is recorded in the system's master account file and master transaction file. Thereafter, system flow passes to block 125, where the floating rate zero coupon note liability schedule is updated to reflect purchases or redemptions.
Next, system flow passes to test 126, which determines whether all the transactions for the particular day in question have been processed. If not, system flow passes back to the beginning of the loop to receive the next customer request. If it is the end of the day and all transactions for the day have been processed, control passes to block 127, which prepares the next day's schedule of floating rate zero coupon note prices.
System flow then proceeds to block 128, which carries out the update asset portfolio operation to determine the updated investment portfolio based on current and projected customer transactions, the aggregate maturity schedule for the floating rate zero coupon notes, the amount of cash available for investment, projected interest rates, the current composition of the asset portfolio, and the portfolio investment criteria supplied by the fund manager.
After the investment transaction data are entered, system flow passes to block 129 where a daily transaction report is prepared for the investment manager. This report summarizes the transactions that took place during the day; provides the end-of-day asset and liability position; furnishes the portfolio yield, investment yield, and composite cost of the floating rate zero coupon note liabilities, all on a semi-annual-equivalent-yield basis; and indicates the projected income flows from the updated asset portfolio and the projected stream of floating rate zero coupon note liabilities. Then at block 130 the variables that measure each day's activity are reinitialized for the beginning of the next day.
Next system flow passes to test 131 where it is determined whether the day in question is the last day of the current period. If not, system flow passes to block 138. If it is the last day of the period, system flow passes to block 132 where the end-of-period investment performance report is prepared. This report provides various measures of investment performance which the fund manager can use to monitor the profitability of the investment program adopted during the period. In addition, it is calculated in block 132 whether the fund is overfunded or underfunded and the amount of any overfunding or underfunding. A significant underfunding would signal to the fund manager the need to find higher yielding investments in the asset portfolio in order to avoid the danger of failing at some point to have sufficient cash to meet maturing floating rate zero coupon note liabilities.
Next system flow passes to block 133 where the system periodically (e.g., quarterly) calculates for each account holder the amount of investment income and the amount of taxable income earned during the period on the floating rate zero coupon notes in his or her account. At block 134 the system prepares end-of-period reports for mailing to account holders. System flow then passes to block 135 where the end-of-period financial statements are prepared drawing on information that has been recorded in the accounting files at block 136 during the period. System flow then moves to block 137 where the variables that measure each period's activity are reinitialized for the beginning of the next period.
Next system flow passes to block 138 where at the end of each day the daily transaction summary and summary of current position are transmitted to the fund manager and at the end of each period the investment performance and position report and the end-of-period financial statements are transmitted to the fund manager.
Thus, both the Roberts and Roberts et al. patents are related to a specific procedure for estimating the expected cost of the liability when the liability is expected to occur, and computing the present value of each unit of insurance needed to yield that expected cost at maturity. However, these patents do not solve the problem of administering and/or managing a program that attempts to optimize or maximize retirement and/or investment resources.
In addition, the Roberts and Roberts et al. patents do not solve the problem of implementing a program designed specifically for managing and/or administering retirement and/or investment resources. Further, the Roberts and Roberts et al. patents do not solve the problem of ensuring that the retirement and/or investment resources are not prematurely diverted, thereby compromising or jeopardizing the administration of retirement and/or investment resources.
The Roberts and Roberts et al. patents also do not solve the problem of tracking the performance of the retirement and/or investment resources, while also managing reports on the performance of the retirement and/or investment resources, in a distributed data base environment. Further, the Roberts and Roberts et al. patents also do not solve the problem of tracking the performance of resources, while also managing reports on the performance of the resources, in a distributed computing environment, such as over the internet and/or intranet and/or private networks.
Accordingly, it is desirable to administer and/or manage a program that attempts to optimize or maximize retirement and/or investment resources. It is also desirable to implement a program designed specifically for managing and/or administering retirement and/or investment resources. It is also desirable to ensure that the retirement and/or investment resources are not prematurely diverted, thereby compromising or jeopardizing the administration of retirement and/or investment resources.
It is further desirable to track the performance of the retirement and/or investment resources, while also managing reports on the performance of the retirement and/or investment resources, in a distributed data base environment. It is also desirable to track the performance of resources, while also manage reports on the performance of the resources, in a distributed computing environment, such as over the internet and/or intranet and/or private networks.